Enron Former Directors Agree To Settle Class Actions
Monday, January 10, 2005 at 9:06AM Following on the heels of the Worldcom directors settlement, former Enron Directors have agreed to pitch in $13 million of their own money to settle securities fraud charges against them. My firm represents the lead plaintiff, the University of California, so other than the article below, I will say nothing:
Link: washingtonpost.com: Former Directors Agree To Settle Class Actions.
Former Directors Agree To Settle Class Actions Enron, WorldCom Officials to Pay Out of Pocket , by Ben White, Washington Post Staff Writer Saturday, January 8, 2005; Page E01
A group of former Enron Corp. directors has agreed to a $168 million settlement of their portion of a class-action securities lawsuit. Insurance will pick up most of the cost, but under the terms of the deal, the former Enron directors will personally pay $13 million.
The announcement of the deal, made by the University of California, lead plaintiff in the Enron class-action case, came on the same day that the lead plaintiff in the WorldCom class-action suit formally announced a $54 million settlement covering 10 former WorldCom directors. WorldCom directors will pay $18 million from their own pockets.
The twin settlements highlight a new phase in the backlash against corporate wrongdoing in which board members are being pushed to bear much higher personal costs for failures in supervision. Liability for official actions is generally covered by insurance: It was nearly unheard of for directors to pay personally, particularly in the amounts announced this week.
The Enron directors covered by the settlement admit no wrongdoing. Plaintiffs in the case have accused directors of selling Enron shares after the company began to give false financial information to the public. The agreement to pay back some trading profits came even though a federal judge in Houston in 2003 dismissed insider trading and fraud charges leveled at the former directors.
The Enron directors' settlement was the fourth reached in a massive class-action case in which shareholders seek to recover losses they suffered in the collapse of the Houston-based energy trader. Investment banking firm Lehman Brothers agreed to a $222.5 million settlement in October, Bank of America to a $69 million settlement in July, and the international unit of now-defunct accountant Arthur Andersen agreed to a $40 million settlement in July 2002.
Claims remain against a number of major banks that handled Enron transactions, against Arthur Andersen and against a number of former Enron officers.
"The settlement is very significant in holding these outside directors at least partially responsible," said William Lerach, lead attorney for the shareholders. "Hopefully, this will help send a message to corporate boardrooms of the importance of directors performing their legal duties.''
Among former directors contributing personal funds were Wendy Gramm, former chairwoman of the Commodities Future Trading Commission and wife of former senator Phil Gramm, and Robert Jaedicke, former dean of the Stanford Business School. In total, 18 former Enron directors joined the settlement but only 10 contributed personal funds.
The WorldCom deal, announced by New York State Comptroller Alan G. Hevesi, resolves claims against the 10 directors in a larger shareholder class-action suit scheduled to go to court next month. Under the terms of the agreement, the group will personally pay a total of $18 million, an amount equal to slightly more than 20 percent of the directors' combined net worth, not including primary residences and retirement accounts. Insurance companies will pay the other $36 million.
It could not be determined yesterday how the payments will be divided among the 10, although Hevesi said one of the group has filed for bankruptcy and will not pay. He declined to identify who.
Each director is required to pay at least the amount he or she received in compensation from WorldCom during the period covered by the lawsuit. Hevesi said another party would cover the bankrupt director's compensation repayment.
In announcing the agreement, Hevesi rejected arguments that forcing directors to pay out of their own pockets would deter people from serving on boards in the future. Generally, companies or insurers cover any litigation costs directors incur as a result of their official duties.
Hevesi said instead that the ruling would help directors perform better in the future.
"The job of directors is to be a fiduciary on behalf of shareholders, to demand documents, to ask tough questions of management," he said. "We believe this settlement will empower directors to do this."
Asked if the settlement could have a chilling effect on would-be board members, Hevesi said, "I believe it will have a chilling effect on any prospective board member whose motivation is not to do their job, who sees serving on a board as a social club."
Hevesi, who is sole trustee of New York's $120 billion public pension fund, is the court-appointed lead plaintiff in the WorldCom shareholder class-action suit.
The 10 former directors who settled were James C. Allen, Judith C. Areen, Carl J. Aycock, Max E. Bobbitt Jr., Clifford L. Alexander Jr., Stiles A. Kellett Jr., Gordon S. Macklin, John A. Porter, Lawrence C. Tucker and the estate of John W. Sidgmore.
Two other former WorldCom outside directors, Bert C. Roberts Jr. and Francesco Galesi, did not join the settlement. Attorneys for Roberts and Galesi declined to comment.
All of the former directors who agreed to settle either declined to comment or did not return calls. Attorneys for the directors also declined to comment publicly. Peter Lucht, a spokesman for WorldCom, now called MCI Inc., also declined to discuss the settlement.
The agreement was formally submitted Friday to U.S. District Judge Denise L. Cote, who is overseeing the WorldCom class-action suit. But approval of the settlement is not expected to come for several months.
Remaining defendants in the case include 16 investment banks that helped WorldCom issue stocks and bonds and Arthur Andersen, the now-defunct accounting firm that signed off on WorldCom's books. In May 2004, Citigroup Inc. agreed to pay $2.6 billion to settle its part of the case. Citigroup's investment banking arm was among the biggest underwriters of WorldCom securities.
Hevesi said on Friday that court-ordered settlement talks with all remaining defendants in the case were ongoing. But he also said he is prepared to litigate the case, which is scheduled to begin Feb. 28.
Several former WorldCom officials have already pleaded guilty to fraud charges, including former chief financial officer Scott D. Sullivan. Former WorldCom chairman and chief executive Bernard J. Ebbers is scheduled to go on trial on charges of securities fraud this month.
Hevesi said on Friday that he insisted that the former WorldCom directors pay a significant portion themselves in order to send a message to other directors.
"I felt personally that this would be unfair and not a deterrent for future failure on the part of the directors if they were not held personally liable," he said.
Hevesi said he did not know how much each individual director would pay. One person familiar with the case, who asked not to be identified by name because all parties had agreed not to discuss the matter publicly, said some of the directors thought they could have won at trial but did not want to risk what could have been liability well in excess of the amount of the settlement.
The directors' position was complicated when the judge overseeing the case ruled last month that a prospectus issued before a massive WorldCom bond offering in 2001 included false and misleading statements.
Under federal securities law, that ruling meant the burden of proof in the case would have fallen on the directors to demonstrate that they conducted a thorough review and could not possibly have known the prospectus was misleading.
Staff researcher Meg Smith contributed to this report.
© 2005 The Washington Post Company
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